by Ron Friedmann , 2001
Written for Jnana Technologies Corporation

Introduction

Business is moving rapidly to the Web and law is following in its footsteps. Large law firms and departments, including Davis Polk & Wardwell and GE, now use the Web to deliver advice. ( Table 1 has additional examples and details).

Not long ago, the question was if delivering legal advice over the web was possible. Today, the question is what are the economics of creating and maintaining legal web advisors? This paper examines the business case for law departments to buy and for law firms to build legal web advisors.

Legal web advisors are more than memo banks. To provide valuable advice over the Web, lawyers must create Web-based content. One approach is to create deeply linked, document-rich web sites. But documents do not answer questions. Clients must find the relevant documents, read them, and determine how to apply the law to their own circumstances. A better approach is to create legal web advisors that intelligently collect client-specific facts and either answer the question or prepare a streamlined in-take report for a lawyer.

Why Law Departments Should Use Legal Web Advisors

As cost centers, law departments face constant pressure to control expenses. Legal web advisors can reduce costs. At the same time, they allow in-house counsel to provide better service to their business clients. Although law departments can produce their own legal web advisors, the economics favor buying from suppliers. Heavy client demands and headcount limits leave little in-house lawyer time to create legal web advisors. Moreover, law firms, legal publishers, or other vendors can sell similar content to multiple clients, thus spreading development and maintenance costs over a broader base, which lowers the cost per user. Consequently, law departments are more likely to buy from third parties than create their own.

General counsels can site three benefits, described below, to justify buying legal web advisors. A subsequent section examines ways to quantify these benefits.

Benefits of Legal Web Advisors

Faster Turnaround. Many business decisions require legal input. Delivering advice when and where it is needed can speed closing deals and move products to market faster. For example, heavy advertisers typically review all ad copy for legal issues and manufacturers often review all design changes for possible patent infringement. Legal web advisors can overcome staffing limits, time zones, and other barriers that often make it difficult to answer legal questions quickly. They can advise brand managers or engineers in real time, thus accelerating the time to market. If they cannot answer a question, legal web advisors nonetheless speed up service. They intelligently interview clients and send an in-take report to a lawyer who can then advise clients.

Reduce Legal Risks. Business people sometimes do not consult a lawyer because it costs too much or takes too long. Legal web advisors make it cheaper and easier to get advice so clients are more likely to seek it. This can help avoid bad decisions that lead to monetary liability, sanctions, or fines. For example, the sale of insurance or securities may require assessing an investor’s suitability. Lawyers or compliance officers cannot review every transaction. But agents or brokers can use a legal web advisor to evaluate each transaction. Alternatively, a legal web advisor can run centrally (“batch” mode) and check each application before approving it. A related benefit is that legal web advisors reduce the risk of inconsistent guidance and the legal exposure inconsistency creates.

Refocus In-house Lawyers on Pro-active, High Value Advice. In-house lawyers spend much time helping clients with routine but complex questions. By off-loading these questions to legal web advisors, lawyers have more time for high value counseling and preventive law measures. Aside from the benefit to business units of more strategic advice, letting lawyers focus on high value issues can increase their satisfaction and thus reduce costly turnover.

Quantifying the Benefits

The decision to buy legal web advisors may require quantifying these benefits. Developing precise metrics and return on investment data for law departments is notoriously difficult. But several approaches allow estimating the financial benefit:

• Survey line managers to determine the value of time saved in sealing a deal or pushing a product to market faster. Estimate the timesaving possible using a legal web advisor, apply the value found in the survey, and then compare the benefit of faster turnaround to the cost of the legal web advisor.
• Estimate the time in-house lawyers spend on routine but complex reviews that could be handled, at least in part, by legal web advisors. Law departments that do not already have this data may need to survey their lawyers or track time for a short period to collect the data. Make reasonable assumptions about the potential timesaving, which represents either the opportunity to perform higher value work or the ability to serve growing demand without increasing headcount.
• Measure the cost of judgments, penalties, and fines over a historic period. Estimate what percent of the cost arose from decisions that could have been avoided with timely legal advice. Use this as a measure of the potential savings a legal web advisor could generate.
• Survey business unit managers to determine if they receive all the pro-active, strategic advice they need. Ask them the value of having more lawyer time for strategic work.

In quantifying the benefits, it bears repeating that one must focus on the total cost of legal services. A focus on the law department budget for staff and for outside counsel ignores the explicit and often larger cost of settlements and judgments (liability payments, sanctions, or fines). It also ignores the business cost of delay. Legal web advisors have the potential to lower lawyer costs, limit settlements/judgments, and improve cycle times.

Why Law Firms Should Build Legal Web Advisors

Creating legal web advisors requires lawyer time and other resources. Before making this investment, firms will need to determine the profit potential. The sections below discuss a direct revenue/profit model and a client development approach.

Generating Profits Directly

There are at least three business models for generating direct profit by selling legal web advisors ( Table 2 summarizes each approach):

Simple Generic System. A simple generic system deals with one or more relatively simple legal issues that affect many employees. An example is a system to help managers determine if a worker is an employee or contractor. Such systems generate revenue via relatively modest subscription or per-use fees. No large law firms appear to be providing such systems at this time.

Complex Generic System. A complex generic system deals with a complex legal issue that affects a handful of industries. An example is compliance guidance for financial institutions. These know-how systems support relatively high subscription or per-use fees. Linklater’s Blue Flag appears to be an example of this approach.

Customized System. Customized systems deal with unique legal issues or with simple or complex generic systems that require a high degree of customization. The need for customization may stem from company-specific approaches to legal analysis or from the need to integrate with internal company databases. Because of the high degree of customization, these systems would be sold on a project basis, perhaps with on-going charges to maintain the system. For many topics, however, firms could re-use the core legal reasoning in one custom system in a different one, which opens the door for significant re-use of core content across clients. Blake Dawson Waldron’s advertising compliance advisor appears to be an example of this approach.

Large law firms are likely to focus on complex generic or custom legal web advisors. First, these play to the strength and depth larger firms have across many legal domains. Second, firms would deliver them to existing clients or form a lawyer-client relationship prior to delivery. By focusing on clients, firms can likely avoid ethical issues such as unauthorized practice of law and conflicts of interest. And third, selling them avoids mass marketing, an activity in which few large law firms are experienced.

Comparison to Other Investments

Firms that regularly analyze practice area profitability should be able to apply their analytic approach to assess the potential value of legal web advisors. For firms that do not, the analysis is harder but presumably these firms can apply the same metrics to creating web advisors as they do to each practice area. Whatever measures a firm uses, it should set reasonable expectations and allow sufficient time for the business to develop.

In addition to predicting potential profit, firms should also assess the financial risks. This risk of creating legal web advisors is probably less than the risk of opening a new office, starting/acquiring a new practice area, or acquiring another firm. First, in the subscription fee or project model, firms can seek client commitments before investing. And second, the fixed expenses of creating a web advisor are probably lower because there is neither a leasehold expense nor a commitment to high compensation for new partners or associates.

Investment decisions are not driven purely based on profits or risks. Some firms open offices or practices to position the firm appropriately in the marketplace (e.g., “we are a full-service firm” or “we are an international firm with a presence in major countries”). Providing legal web advisors can similarly position law firms (see discussion below concerning client development).

Generating Profits Indirectly via Client Development

Law firms invest many hours and significant out of pocket expenses in client development. Client development encompasses any activity – from face-to-face meetings with prospective clients to publishing articles that enhance the firm’s reputation – intended to win new clients or new matters from existing clients. Firms that view creating legal web advisors as a client development activity can evaluate the payback using whatever metrics they use to assess other client development. These can include several measures:

Competitive Differentiation. Firms that deliver services over the Web set themselves apart from their competitors. “First movers” typically attract the attention of clients and prospects and are likely to gain market share at the expense of their competitors. For example, in-house lawyers are more likely to agree to a meeting with a law firm for a truly new service like legal web advisors than for more me-too advice. The foot in the door can be quite valuable and may lead to traditional representation. Firms can track their success in setting up meetings with prospects and the outcomes and then compare these outcomes to other ways they contact in-house counsel directly. They can also track all inquiries arising from creating legal web advisors and compare this lead flow to other sources.

Generate New Billable Matters. When a legal web advisor cannot answer a question, it can send an e-mail message to in-house counsel or the law firm indicating that further advice is needed. Some of the issues so identified can give rise to traditional matters. It is a fairly easy task to track any new matters generated this way and compute the value to the firm. The value created may be especially high where a firm delivers a legal web advisor to a client in an area of law where it is not already regularly retained by the client for advice. The discussions leading up to installing the legal web advisor lets the firm learn about the client’s needs and form personal relationships. This background may allow the firm also to get access to higher value questions/matters that are not easily answered by the legal web advisors, thereby gaining share at the expense of a competitor.

Enhance the Client Relationship. Lawyer-client relationships are not as stable or long lasting as they once were. While there is no substitute for deep personal relationships, a know-how delivery system can help sustain and build a client relationship. Aside from tracking new matters from existing clients, the best way to measure this is by surveying clients. For firms that regularly survey clients, it is easy to add questions that assess the impact of offering one or more legal web advisors.

Staffing Flexibility. The lawyers who create legal web advisors do not necessarily have to work full-time or at the same pace as lawyers in traditional practice. Law firms may be able to retain lawyers with valuable skills by letting them work on know-how systems on a reduced or flexible hours basis. To the extent that a firm measures the cost of lawyer turnover, it can measure any improvement in lawyer retention and determine the financial value.

Comparison to Other Client Development

Some law firms have considered delivering advice over the Web but have trouble freeing up lawyer time to capture the requisite expertise. In the current economy, many lawyers have more billable work than they can handle and do not want to turn away clients in need. Where this is true, firms can assess the relative value of different client development activities and consider re-allocating time to developing legal web advisors. For example, it may not take much analysis to show that a couple of hundred lawyer hours spent developing a legal web advisor is potentially more valuable than investing those hours in writing an article, preparing a seminar presentation, or some other traditional client development activity. That is, the choice does not have to be between client work and a new type of client development. Rather, it can be among different client development activities.

Conclusion

Today, the law department that buys or commissions a legal web advisor and the law firm that decides to invest in building one both face what appears to be a difficult decision. The decision seems difficult not because the business case is hard, but because it is about something new. Not long ago, many decisions in the legal market seemed new. On the law department side, it was unusual to consider bringing work in-house or to negotiate fixed price or other alternative billing methods with outside counsel. On the law firm side, it was quite difficult and unusual to open new offices, hire laterals, or merge. While these decisions are not easy, few departments or firms consider them unusual. It is likely that the decision to create legal web advisors will be viewed in the same light soon. As law departments and law firms consider the costs and the benefits, many will soon see that the decision to use or to build legal web advisors is actually easy.

Table 1: Possible Business Models for Legal Web Advisors

Table 2: Examples of Legal Advice and Guidance over the Web

Legal Compliance and Education Center

Provides “employees with the knowledge they need to do their jobs in compliance with the law”

Source: http://www.lrn.com

Large Companies

Linklaters

Blue Flag

“Using technology and the Internet the legal expertise of Linklaters can now be accessed at the touch of a button, wherever you are and whenever you need it… Blue Flag Regulatory delivers detailed regulatory compliance advice directly to the desks of financial institutions via the Internet.

Source: http://www.linklaters. com/english/ blueflag/

Financial Institutions